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How to calculate market size - TAM, SAM, SOM

Perhaps not always obvious, but still one of the main stages of launching any digital product or business in general is the stage of calculating the size of the market. The founder will need these figures to soberly estimate the size of possible profits without inflated expectations, and to make a case to potential investors. 
According to experts, the potential total market should be in the billions of dollars to make venture capitalists interested. So let's do the math and see how well our expectations match reality.

The market calculation consists of 3 steps:

  • TAM (Total Addressable Market) - determining the total available market for a given type of product; 
  • SAM (Serviceable Available Market) - calculation of the available market for you;
  • SOM (Serviceable Obtainable Market) - determining the size of the market that you can actually reach.

Below, we will go through each of the steps in more detail and provide examples of calculations.

Calculation methods

There are two main approaches to calculating TAM, SAM, and SOM: “top-down” and “bottom-up”. Each of the methods has its advantages and disadvantages, and it is worth using both approaches to ensure greater accuracy and completeness of the market size assessment. 

Top-down approach 

The top-down approach starts with a broad market overview and narrows down to target market segments. This method typically involves using industry reports, market research data, and other secondary sources to estimate the overall market size, and then applying various assumptions and filters to determine SAM and SOM. 
Advantages of the top-down approach:

  • Provides a broad market perspective
  • Relatively quick and easy to perform
  • Useful for initial market assessment and high-level strategic planning 

Limitations of the top-down approach:

  • May rely heavily on secondary data that may be outdated or inaccurate
  • May be overly optimistic as it may not take into account specific market constraints or competitive dynamics
  • May lead to an overestimation of the potential market size 

Bottom-up approach

The bottom-up approach begins with a detailed analysis of the company's target market segments and builds on that to estimate TAM, SAM, and SOM. This method involves collecting primary data, such as customer surveys, interviews, and sales data, and using this information to estimate the potential market size. 

Advantages of the bottom-up approach:

  • Provides more accurate and detailed market size estimates
  • Considers specific market dynamics and competitive factors
  • More reliable for setting realistic revenue targets and sales forecasts 

Limitations of the bottom-up approach:

  • Can be time consuming and resource intensive
  • Requires access to reliable primary data sources
  • Some assumptions and estimates may still be required

TAM (Total Addressable Market) - determination of the total addressable market for a given product type

The first step is to calculate the total potential market. It is calculated on the assumption that every potential customer will buy or use your product. 

An example of a top-down TAM calculation:

  • Define the industry: Start by defining the broader industry that relates to your product.
  • Research industry revenue: Gather data on the total revenue of the online food shopping industry. This information can usually be found in industry reports, market research, or financial news articles.
  • Estimate the total market revenue: Let's say we found that the total revenue of the online real estate search market in the United States is $100 billion.
  • Identify the relevant market segment: Estimate the market segment your product seeks to reach. If your product involves searching for real estate online, it is reasonable to assume that 80% of users search for housing online nowadays.


TAM = Total industry revenue × Market segment percentage = $100 billion × 80% = $80 billion. 

As an example of calculating TAM from the bottom up, let's look at UpNest, a US real estate technology company that helps home buyers and sellers save on realtor commissions. 
Given that the median home price is $394,300, there are 5 million sales annually, and the average realtor commission is 5% of the sales price, with 90% of transactions involving a realtor, UpNest operates in a market that generates $88.7 billion in annual revenue.

TAM = $394,300 × 5 million × 0.05 × 0.9 = $100 billion × 80% = $80 billion = $88.7 billion

Next, let's calculate the available market size and the market size that you can cover using the example of a mobile real estate search application.

SAM (Serviceable Available Market) - calculation of the available market size

SAM is the portion of the TAM that a company can actually serve with its current product offerings, distribution channels, and target market. Given the company's constraints and competition, it is a more accurate estimate of the potential market size.

An example of a top-down SAM calculation:
Refining to a serviceable market: Focus on the portion of the total addressable market (TAM) that your app can realistically serve. This includes considering your capabilities, geographic reach, and product focus.

Apply filters to your target market: If your app is targeted at a younger audience that is more likely to use mobile apps to search for real estate, estimate the percentage of your target audience that matches this target audience. Let's say it's 70% of the TAM segment.

SAM = TAM × percentage of TAM segment = $100 billion × 0.7 = $70 billion 

SOM (Serviceable Obtainable Market) - determining the size of the market you can actually reach

This is the percentage of potential customers who can become your actual customers. To calculate it using the top-down method, you need to:

  • Research competitors and their market shares;
  • Conduct surveys or focus groups to assess interest in your product;
  • Take into account market trends and seasonality of demand.

An example of a top-down SOM calculation:
Assess your competitive position: Evaluate your competitive advantage and potential market share within the Serviceable Available Market (SAM). Take into account factors such as the usability of your app, partnerships with grocery stores, pricing, and marketing strategy.

Estimate the achievable market share: Using your competitive analysis and marketing strategy, estimate the percentage of market share your app can realistically capture within SAM. For example, based on your analysis, you might estimate that your app can capture 10% of the SAM market in the early years.

SOM = SAM × SAM segment percentage = $70 billion × 0.1 = $7 billion 

Tools and resources for sizing the market

You can estimate TAM, SAM, and SOM in your industry using a variety of tools and resources:

  • Industry reports and market research data: These sources provide detailed information on market size, growth trends, and competitive dynamics in your industry. For example, IBISWorld publishes comprehensive reports on market sizes and growth rates. Statista offers statistics on various industries and markets.
  • Public financial reports: Public companies publish financial reports that provide insight into market size and competitor performance. For example, reports on Form 10-K, annual reports submitted by US public companies that provide detailed financial information.
  • Annual reports of companies: Useful for understanding market conditions and competitors' strategies.
  • Primary research: Conducting surveys, interviews, and other primary research methods to gather important data about your target market and potential market size.
  • Focus groups: Gain qualitative insights into customer preferences and behavior.

Market research tools:

These tools provide access to dynamic market information on demand, helping you estimate TAM, SAM, and SOM for your industry:

  • SimilarWeb: Offers analytics on website traffic and industry trends.
  • Google Trends: Analyzes the popularity of search queries in different regions and languages.
  • SurveyMonkey: Facilitates the creation and distribution of surveys to collect market data.

By using these tools and resources, you can comprehensively analyze and evaluate the market size for your product, making informed business decisions.

Market sizing is an important step for successful business planning and development. By following these steps, you will be able to get a clear picture of the potential size of your market and better prepare for entering it. This will allow you to allocate resources more efficiently, focus on the most promising customers, and maximize the success of your business activities.






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